KPJ Healthcare Berhad

Healthcare demand fuelled by favourable demographics

Demand for private healthcare has remained resilient as a larger proportion of the working population

Healthcare sector
Maintain overweight : Demand for private healthcare has remained resilient as a larger proportion of the working population (aged 1564, who made up 65.4% of the total population in 2012 versus 62.8% in 2000) has helped fuel better affordability and awareness of healthcare standards.

Going into 2013, IHH Healthcare Bhd's earnings would be underpinned by die progressive rampup in operations of the new Mount Novena Hospital, with phase 2 comprising 183 beds slated to come onstream by mid2013.
Beyond that, the next phase of growth is expected via capacity expansion in existing hospitals and the construction of new hospitals, which would add an additional 976 and 726 beds in Malaysia and Turkey respectively.

KPJ Healthcare Bhd has set an internal target of growing its medical tourism business for a revenue contribution of 25% by 2020 (it currently stands at below 10%). As such, we expect KPJ to continue to be on the lookout for more acquisition targets beyond Malaysia to grow its medical tourism business. We note that the company recently acquired a 23.4% stake in the 500bed Vejthani hospital in Thailand, which is well known regionally for its orthopaedic treatment.

We expect average latex prices to remain below the RM6/kg mark over the next quarter as rubber production hits the seasonal peak period. As such, we expect natural rubber glove manufacturers to enjoy another quarter of margin expansion given the lower average latex price of RM5.76/kg currentiy (versus RM5.90/kg in the fourth quarter of 2012).

The risks include: 1) change in requirements set by the health ministry; and 2) execution risk on capacity expansion.

We rate KPJ as our top pick among the private healthcare service providers given its relatively cheap valuations of 20.1 times calendar year 2013 (CY13) price earnings ratio (PER) compared to regional peers'
valuation of 27 times CY13 PER.

While we continue to like IHH for its wide network of hospitals and strong earnings visibility, the stock's price has performed relatively well compared to the KLCI, rising 9.8% since its listing (versus 3.6% for the KLCI). Given the limited upside to our fair value of RM3.53, we are downgrading our call on the stock to "market perform" (from outperform).

As for the rubber gloves subsector, we expect Top Glove Corp Bhd and Kossan Rubber Industries Bhd to be the prime beneficiaries of falling latex prices given their larger proportion of latex gloves in their product mix. We, thus, maintain our "outperform" call on Top Glove and Kossan, with an unchanged fair value of RM6.29 and RM3.73, based on a target CY13 PER of 15.5 times and nine times respectively.
Maintain overweight. — RHB Research,Jan 2